Tellabs' growth on hold, but future called bright

Company enjoys relative strength vs. competitors

August 12, 2001|By Jon Van, Tribune staff reporter.

A year ago when Tellabs Inc. sales were sailing toward $3 billion and its stock price was north of $60, Richard Notebaert, the former Ameritech chief, took the helm to guide Tellabs to its ambitious goal of being a $9 billion company by 2003.

This year, the company's sales will probably be off about a billion dollars, its stock is south of $20, and employees fear that more layoffs are in the works.

On Friday, Tellabs stock closed at $15.22, up 4 cents for the day, well off its 52-week high of $68.50.

And for a telecommunications equipment vendor, Tellabs is doing pretty well.

Despite believing enough new-economy hyperbole to expect it could triple business in three years, Tellabs management has made the right choices for a bright future, analysts say.

The company is debt-free, has a billion dollars in the bank, is operating in the black and has several new products it expects will sell well once the telecommunications industry picks up again. Analysts say that while multibillion-dollar losses at major rivals like Lucent and Nortel threaten the giants' survival, Tellabs has few long-term worries.

In hindsight, what happened is fairly clear, said Notebaert: A new federal law encouraging telecom competition combined with free-flowing capital that funded more new phone companies than could hope to survive.

"There was a telecom gold rush," said Notebaert, "and most of them didn't find gold. But they all bought shovels."

Tellabs, which makes systems to manage network traffic--the on- and off-ramps to the information superhighway--was willing to sell to all comers, but it didn't act as a banker in the process.

"We're conservative and we didn't finance equipment sales," said Notebaert. "All of our sales were real."

But the boom times of 1999 and 2000 were an aberration, he said--even though at the time people at Tellabs and throughout the sector thought it was just the beginning of an era of rapid expansion.

When the capital spigot shut down and competitive phone companies started calling bankruptcy attorneys this year, Lucent and some other equipment vendors found themselves holding billions in worthless paper for equipment they had supplied--and in some cases financed--to the upstart firms.

This reflected a decision to literally buy into the vision that the upstarts and their zippy technology were going to dominate the new Internet era, leaving the stodgy old Bells and their ilk in the dust.

"Lucent focused on customers who went bust and ignored the customers who didn't," said Susan Kalla, a telecommunications analyst with Friedman, Billings, Ramsey & Co. "Tellabs and Dick Notebaert stuck with the Bells, and the Bells won the war.

"When Tellabs hired Notebaert, they knew it was likely the Bells would win, which is why they hired a guy who'd run a Bell company. So now they look like geniuses. They're very well-positioned for the long run."

More cost cuts planned

But in the short run, things aren't especially rosy for the Lisle-based firm. Its plants are running on a four-day workweek, Notebaert has said he wants to trim another 5 percent in operating costs by the end of the year, and there may be some consolidation of Tellabs' 11 facilities worldwide.

This has caused apprehension among employees who have asked pointed questions of the CEO at open meetings and in e-mails. Notebaert has responded by saying that expenses must be trimmed, suggesting that more jobs may be cut. Tellabs has already dropped about 550 full-time jobs and 450 part-time jobs, as well as leaving unfilled some 1,100 positions that had been budgeted when the firm was ramping up. Current total employment is about 8,000.

"When you're asked a question while you're in the midst of assessing things," said Notebaert, "I think you have to give a straight answer. We're all in this together."

Notebaert is no stranger to cutbacks. Almost a decade ago at Ameritech he presided over the shedding of nearly one-fourth of the phone carrier's management force in an effort to expunge its monopoly mind-set and become more customer-oriented.

That was especially difficult because many Ameritech employees thought they had jobs for life. At Tellabs, Notebaert said employees understand the need for cost reduction.

"Everyone here is a shareholder," he said. "This has never been a monopoly, so everyone understands competition. They may not like what we have to do, but they can see the reasons for it. You can't have a cost structure to support a $4 billion operation when your revenues drop below $3 billion."

Long before Notebaert joined Tellabs, the company set goals quite publicly. It had a slogan, "2B by 2K," that summed up its goal of hitting $2 billion in sales by 2000. When the $2 billion in sales came in 1999, followed by $3 billion in 2000, the giddy good times spawned the new goal of $9 billion by 2003 that was expressed by Michael Birck, Tellabs' co-founder and chairman, when he hired Notebaert.